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Parent companies and their subsidiaries: The importance of legal structures and sound corporate governance in mitigating risk

As businesses consider post Covid-19 recovery planning and a transition back towards normality, directors and shareholders are assessing their corporate purpose, culture and strategy and how these are positioned throughout their business and supply-chains.

Over time corporate group structures have developed and evolved. However one principle that had largely remained the same was the general presumption that parent companies are separate legal entities, with separate legal personalities to their subsidiaries. Therefore, the parent companies are not typically responsible for the debts or actions of these subsidiaries.

However, the recent Supreme Court decision of Okpabi v Royal Dutch Shell plc [2021] UKSC 3 (‘Okpabi’) following the lead set in the earlier Supreme Court case of Vedanta Resources plc and another v Lungowe and others [2019] UKSC20 (‘Vedanta’) has gone some way to undermine this principle.

Jurisdiction and Cross Border Separation

The case of Vedanta raised the question: Do English Courts have jurisdiction to hear a claim brought by foreign claimants against an overseas subsidiary of a UK domiciled company as the result of its alleged negligent act. The Supreme Court answered in the affirmative with the following reasons given:

  • There was an arguable duty of care between the claimants and the defendant(s);
  • There had been no breach of EU law (notably the Recast Brussels Regulation, Articles 4 and 8); and
  • The claimants were unable to obtain substantial justice in the overseas jurisdiction.

Proximity of Relationship between Parent Companies and their Subsidiaries

In the case of Okpabi, the Supreme Court was required to determine whether a duty of care existed between the parent company and its subsidiary. To decide this, an assessment as to the proximity of the relationship between the two companies was necessary. This determination is the second limb of the test as set out in Caparo Industries Plc v Dickman [1990] 2 AC 605.

In both Vedanta and subsequently Okpabi, proximity was measured by assessing whether there was sufficient control exercised over the subsidiary company by the parent company. Now known as the ‘Vedanta Route’, the non-prescriptive four elements considered whether the parent company:

  1. Takes over the management of or joint management of the relevant activity of its subsidiary;
  2. Provides defective advice and/or promulgates defective group-wide safety/environmental policies which are implemented by its subsidiary;
  3. Promulgates group-wide safety/environmental policies and takes steps to ensure the implementation of those policies by its subsidiary;
  4. Holds out that it exercises a particular degree of supervision and control over its subsidiary.

In Okpabi, evidence relevant to the Vedanta Route was assessed. Satisfied that all four elements had been met, the Supreme Court found that there was sufficient control to satisfy the question of proximity and as such the claimants were in fact owed a duty of care by Royal Dutch Shell plc.

Piercing the Corporate veil

The consequence of the decision(s) in Vedanta and Okpabi is that the Supreme Court had permitted a direct negligence claim to proceed against the UK domiciled parent company, for activities conducted by its overseas subsidiary; ultimately circumventing the corporate veil. The level of ownership was an irrelevant consideration in the decision(s).

Although the imposition of parent company liability may initially seem to offend against the principle of corporate separateness, technically the veil remains intact. The rulings do not mean that a parent company automatically becomes liable for the acts of omissions of its subsidiary. It is still incumbent upon a party seeking to bring an action in this way to prove that a separate, direct, duty of care exists.

How we can help

Our team of regulatory compliance lawyers can help organisations with the assessment of risks associated with existing corporate strategies, policies and procedures throughout their corporate structure, helping clients to remain compliant and adhere to best practice standards.

Contact us

Agnes Quashie

Agnes Quashie

Partner, PwC United Kingdom

Tel: +44 (0)7764 235 495

Polly Miles

Polly Miles

Solicitor, Senior Manager, PwC United Kingdom

Tel: +44 (0)7753 463529

Nabeel Osman

Nabeel Osman

Senior Manager, PwC United Kingdom

Tel: +44 (0)7718 978999

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